43.7
7. You are an established investor with a large portfolio and are
considering the following additional investments:
Stock A |
Stock B |
Portfolio of C&D |
|
| Beta | 1.1 |
1.5 |
1.5 |
| Std Dev | 0.6 |
0.4 |
0.3 |
Another possibility is to invest half of your money in Stock A and half of your money in Stock B. You can assume that the standard deviation of that portfolio (of A & B) would be 0.45. Which of these possibilities: A, B, the portfolio of C&D, or a portfolio of half of your money in A and half of your money in B, is the least risky investment for you? (3)
You should choose Stock A. Since you are an established investor with a large portfolio, you are not concerned with unsystematic risk (you have diversified it away). Thus, the security with the least systematic risk is the least risky from your standpoint: Stock A with its beta of 1.1 fits the bill.